Nirma Ltd Share Price Management Discussions
NIRMA LIMITED
ANNUAL REPORT 2010-2011
MANAGEMENT DISCUSSION AND ANALYSIS
CAUTIONARY STATEMENT
Some of the statements in the report describing the Companys objectives,
projections, estimates and expectations may be forward-looking statements
within the meaning of applicable securities laws and regulations. The
forward looking statements have as their basis certain assumptions and
expectations about behaviour or outcome of future events and / or economic
variables. The Companys operations may be affected by these economic
conditions, demand / supply scenarios, price conditions, market conditions
in which the Company operates, changes in the Government Policies, changes
in fiscal laws and other incidental factors. The Company therefore does not
guarantee that these future events and/or economic variable will
materialise in the same way they are assumed or projected. Actual
performance of the Company could thus differ materially when compared with
projection made in the forward looking statements.
ECONOMY & MARKET TREND
The inflationary situation in the economy continues to be a cause of
concern in FY 2010-11. Increasing International oil prices, likely
decontrol of diesel prices, high global food prices and higher minimum
support price for the upcoming agriculture season are some of the factors
that constitute the upside risks to inflation. Sectors like manufacturing
and mining have witnessed considerable erosion of growth momentum over the
last year. While consumption demand is still holding, a sharp decline in
the growth of investments is seen.
The intensifying trends in interest rates, raw materials cost and fuel
prices, likely to slow down the economic scenario in Asian economies.
However, the momentum gained in export activities during the second half of
the year under review show some promising outlook.
COMPANYS PRODUCTS
The Company has diversified portfolio of Soaps and Surfactants, Healthcare
and Processed Minerals.
Your Company is one of the leading fast-moving consumer and chemical
companies in India. Nirma and Nima brands are household names and have
been accredited several times as one of the best Indian brands. Nirma has
created the market for itself and even been adjudged as one of the Super
brands of India.
Soaps and Surfactants business include Soaps & Detergents as well as key
chemicals and packaging required in their manufacture. As a part of
backward integration strategy, the Company has, in stages, set up
manufacturing facilities for Synthetic Soda Ash, Normal Paraffin, Linear
Alkyl Benzene (LAB), Linear Alkyl Benzene Sulphonate, Sulfuric Acid,
Industrial Salt, Alpha Olefin Sulphonate, Glycerin, Fatty Acid and Packing.
The Company also operates one of the largest solar salt works of Asia.
The Healthcare Plant spreads across approx. 550 acres, located at Sachana
near Ahmedabad. The plant is currently equipped with approx. capacity of
325 mn Large Volume Parenterals, 1.5 Billion Small Volume Parenterals and
1.5 billion units of medical devices. The Company has successfully
completed new facilities for formulation manufacturing and is in the
process of approvals, validation and then commercial production. The
facilities are planned with size and scale to cater to domestic as well as
international markets.
Indias Soda Ash consumption is increasing @ 5% growth rate against a 2%
global growth rate. In various perspectives, the aggregate domestic volumes
are insignificant compared to China, Europe and the USA. This is evident by
the fact that Solvays global capacity is almost double than the size of
entire Indian capacity. However, Indias soda ash market is attracting
global players, making scale essential for local producers to remain
competitive. After acquisition of US-based natural soda ash facility in the
later part of 2007, the Company has reached to top seven global producers
of the commodity. The Companys USA based subsidiaries Searles Valley
Minerals Inc. and Searles Valley Minerals Operations Inc. (SVM), are
engaged in processing of Soda Ash, Boron & Sodium Sulphate from Trona
deposits in the western USA. Trona is an evaporate mineral and is of
primary importance in the soda ash market as a competitor to synthetically
produced material. Advanced solution mining and crystallization techniques
of SVM yield approximately two million tons of consolidated minerals each
year.
Currently the manufacturing facilities of the Company are located at
Mandali in Dist. Mehsana, Moraiya in Dist. Ahmedabad, Alindra in Dist.
Vadodara, Kalatalav in Dist. Bhavnagar, Sachana in Dist. Ahmedabad and
Searles Valley, Ridgcrest in the USA for Subsidiary.
OVERVIEW OF SALES
Soaps and Surfactants
The sector is volume driven and characterised by low margins. The products
are branded and backed by aggressive marketing, heavy advertising, slick
packaging and robust distribution network. Also, raw material prices play a
vital role in determining the pricing of the finished product. Keys to
success for this segment are brand building, extensive distribution network
and control over raw materials. Your Company has established over the years
strong brand name, loyal distribution channels and millions of satisfied
customers. The Company continues to provide the best quality products at a
fair and competitive price through nation-spread distribution network. The
rural markets are the main growth drivers. According to the survey, the
size of the rural India would become bigger than the total consumer market
in some of the countries like South Korea or Canada in another twenty
years.
The turnover of Soaps & Detergents for the FY 2010-11 has declined
marginally to Rs. 1626 crore from Rs. 1787 crore of previous year. During
the year under review, sales from the Soaps & Detergents accounted for 32%
of the gross sales on consolidated basis and 46% of gross sales on
standalone basis.
Sales of Soda Ash & Linear Alkyl Benzene at Rs. 1038 crore from Indian
operation accounted for 30% of the gross sales on standalone basis. The
Company had started manufacturing and marketing of Caustic Soda since last
year, surging exposure in commodity chemicals. The sale of Caustic soda was
at Rs. 89.07 crore in of FY 2010-11.
Healthcare
Pharma business continues to be impacted by increased raw material prices
and stiff competition. Despite this, the Company achieved gross sales of
Rs. 329 crore, up from Rs. 230 crore for the previous year. The Company
sold 1825 lac units of infusion and 4029 lac units of injectable. By
offering complete pharmaceutical product range and taking advantage of
credibility of Nirlife brand from its business over last 4 years of time,
the Company will be able to make diversification into promising markets of
pharmaceutical domain successfully. The Company has also parallely
established independent distribution network and sales team to handle
market of this new division products.
Processed Minerals
Processed Minerals manufactured in the USA-based production facilities are
marketed mainly in USA, Latin America and Europe, with marginal volumes
coming from Japan, China & Gulf countries. The products find application in
manufacture of container glass, flat glass, detergent, agricultural and
fire retardant industries.
Like most sectors, Processed Minerals markets have also been impacted by
the worldwide recession. Globally, the glass industry only, consumes about
half of the global production of soda ash, and has been impacted by
deterioration in the infrastructure and automobile sectors. For processed
minerals, the markets are tied to the GDP growth rates, standard of living
and the need to conserve energy. For the Boron products, the weakness in
the US housing sector has been partially counterweighted by the energy
conservation legislation in the European Union, awareness to increase crop
yield from Boron deficiency in Asian countries, Chinese incentives to
purchase luxury items in the rural areas and new applications such as TFT
glass, solar panel parts etc.
The Company continues taking measures like looking to alternative markets,
reallocation of labours, implementation of maintenance programs etc. to
counter the recessionary pressure in US market. Sales from this segment for
the year converted into INR stood at Rs. 1522 crore which was 30% of
consolidated gross sales of the Company.
OVERVIEW OF COST & EARNINGS
The total operating expenses, including interest, during the year was Rs.
2890 crore for FY 11 as against Rs. 2571 crore for the previous year. As a
percentage of gross sales, it was 82% as against 77% for the previous year.
Material consumption at Rs. 1465 crore during the year was 42% of gross
sales. Earnings before Interest, Depreciation and Tax at Rs. 436 crore
decreased by 28% as compared to Rs. 605 crore of the previous year. The
depreciation was Rs. 314 crore for the year as against Rs. 288 crore in the
previous year.
The net profit was at Rs. 74 crore as against Rs. 238 crore of the previous
year. Debtors at Rs. 316 crore are marginally higher than Rs. 269 crore in
previous year. The total debt to tangible net worth ratio of the Company is
0.61. The Earning per Share stood at Rs. 4.65.
On consolidated basis, the Company achieved Gross Sales of Rs. 5009 crore.
The Earning before Interest, Depreciation and Tax was Rs. 546 crore,
declined by 25% over the previous year. The Net Profit was at Rs. 95 crore
during the year. The consolidated Earning per Share stood at Rs. 5.96.
The Companys strong financial risk profile is marked by a comfortable
capital structure with high net worth, with healthy cash accruals. The
Company had a net worth over Rs. 2468.84 crore as of March 31, 2011.
INTERNAL CONTROL SYSTEM
The Company has Internal Control System commensurate with the nature and
size of the business to ensure safeguarding of assets, reliable financial
reporting system & compliance with applicable rules and regulations.
RISK MANAGEMENT
Risk in varying degrees and form is integral to any business. The Company
and its Subsidiaries are primarily exposed to risk related to sources as
well as rate of key raw materials not manufactured internally, Exchange
Rate, Interest Rate and Information Technology.
Through planned and timely backward integration, the Company has partially
mitigated risk arising from sourcing and cost of its key raw materials,
such as Soda Ash, LAB, Sulphuric Acid, Fatty Acid, Packaging Materials and
Industrial Salt. The Company would have been exposed to vagaries of market
forces had it not installed these manufacturing facilities in time.
However, the significant risk of price movement still continues in respect
of Kerosene, HDPE Granule, Non-Edible Oils, Coal and Coke.
The Company has entered into Interest Rate Swap for all the ECBs. The
Exchange Rate position in respect of these loans has not been hedged as the
Company believes that the Rupee in long term will revert in the vicinity of
draw down rates. Short Term Borrowing is mainly in Rupee and does not pose
any major risk in terms of movement of Interest Rate.
The Companys internal IT Team has deployed enterprise wide financial
information system software. The in- house management of IT infrastructure
provides greater degree of flexibility to users and stability to the
management reporting system.
The Companys exposure to risk related to execution of Project remains from
Cement Project. The Company has highly experienced in-house project team
which has implemented all the major projects undertaken by the Company in
last ten years. To further mitigate the risk, the Company has sourced best
of the suppliers, consultants and contractors, having requisite experience,
for both the projects. However, the Company continues to be exposed to
project risk emanating out short supply of labour, natural factors such as
heavy rains and other force majeure events. The Company has adequate
insurance coverage for various risks to its assets.
HUMAN RESOURCES
The management believes that the employees working at various locations and
levels are performing vital role to achieve success of the Company. They
continuously play the significant role to deliver the credible performance
year after year. The management and employees of the Company are committed
towards maintaining of harmonious industrial relations. The Company
provides safe and secure work environment for each and every employee. It
conducts periodic communication exercises to keep its employees apprised of
their performance.
The Company also strongly believes in providing amicable and healthy
working environment to its human assets. The Company provides under
umbrella of welfare and social security scheme, natural and accidental life
insurance and medical insurance for employees and their family, interest
subsidies on housing and vehicle loans. Manufacturing facilities of the
Company are supported with canteens for providing hygienic food and other
modern facilities including creches for female employees.
ENVIRONMENT AND SAFETY
Your Company remains compliant with Health, Safety & Environment
obligations as applicable for plant operations. The Company has obtained
requisite environmental consents / approvals for its various production
units from the respective competent authorities and is conscious of its
responsibility towards creating, maintaining and ensuring a safe & clean
environment for sustainable development.
The Company has adopted well proven Eco-friendly and Energy Efficient
Process Technologies. The Company has engaged external reputed agencies for
regular monitoring of Ambient Air Quality, Stack Emissions, Effluent
discharge, Noise etc. inline with statutory & regulatory guidelines. The
Company is committed to comply with relevant laws and regulations as well
as take any additional measures considered necessary. Apart from the
environment monitoring, the Company has made efforts towards water resource
conservation by developing Rain Water Harvesting Ponds & wells, Roof-Top
Rain Water Harvesting and reuse of treated effluent wherever possible
towards endeavour to achieve Zero-Discharge. The Company is working towards
better efficiency to reduce the energy, water and other natural resources
consumption per unit output. The Company has developed greenbelt/
plantation in plant facilities for improvement of environment.
The Company has also implemented ON-SITE & OFF-SITE Emergency Plans for
efficient management, in case of accident / incident to minimize losses to
human lives and property, both in and around the plant facilities. To keep
employees updated on environmental & safety measures, various training
programs, in-house Mock-Drills, celebration of Safety Weeks & various
safety related awareness activities are conducted on regular basis. The
Company has also won many safety Awards at various level.
FUTURE OUTLOOK
Soaps and Surfactants
The FMCG Companies have been reeling under input cost pressures since many
quarters, consequently almost all the Companies were forced to increase the
prices although the price hike insufficient to cover the escalated cost.
The Soaps and Detergents industry continued to record moderate value growth
during the financial year. Going forward the growth will continue to be
moderate or could even decline as most of the current growth was cost
driven increase. Volume growth for Soaps and Detergents will continue to be
marginal in view of high level of penetration in India. Much will also
depend on the pan India sufficiency of rains. Though the Company has been
losing market share over the past few years because of intense competition,
the Companys strong brand and high sales penetration will help it maintain
its position as a leading detergent manufacturer in the country.
Soda Ash industry is characterized by high logistic costs, energy
intensive, high capital investments & cyclicality akin to commodity
product. Hence key to success lies in better integration, conservative
financial policies, export focus and cost conscious business practices.
Demand-supply situation in China, business plan of American Natural Soda
Ash Corporation, demand from glass & detergent industry and crude oil
prices are the major determinants of international Soda Ash prices. Demand
for Soda Ash both on the emerging and developed markets is demonstrating
significant growth indexes. The levels are gradually moving towards the
pre-recession levels. As previously experienced, the demand for flat glass
and detergents will remain the leading end-use application segment of Soda
Ash and will perform as key market driver in the developing countries. It
is estimated that the world market of Soda Ash will outpace some other
inorganic chemicals market increases and will exceed 45 Mn metric tons by
2015.
Healthcare
India is the one of the largest market worldwide and is one of the largest
exporting countries in pharmaceutical domain due to edge over others. The
growth prospects in pharmaceutical market are very promising and the sector
is growing at more than double digit in the domestic market.
The Company has always focused on selection of best and proven technologies
for all the products that it undertakes to manufacture. The emphasis is
always on quality and to clearly establish itself as a quality supplier.
The Company has, as of date, complete coverage across the country and
worldwide and well acceptance of Nirlife brand products.
The Company has from beginning focused on development as an independent
activity, and has set up one complete independent unit for formulation and
development of products. This initiative helps in creating inherent
strength with respect to development, which will be very useful when
company will undertake business in regulated markets. With completion of
pharmaceutical formulation facility, the Company has unique set up
worldwide having Parental Products, Medical Devices and Pharmaceutical
Formulations under one roof.
Processed Minerals
Glass and infrastructure sectors including construction industries have
recently stabilized and are poised for recovery. Full recovery is
anticipated to be accelerated in developing economies while demand in
developed countries will lag by as much as two years.
Soda Ash market is expected to recover as the global economy recovers
strength. However, the pricing is not expected to improve due to
significant overcapacity in China and a new facility in Turkey. As the US
housing industry recovers, boron markets are expected to have even stronger
growth. Demand for boron-based minerals, considered a leading indicator of
economic activity, has stabilized and is increasing.
The Company also has the ability to export into a variety of end-uses and
countries in order to optimize its customer portfolio. Demand is wide-
spread geographically and the customer base is highly fragmented. In
addition, substantial portion of the market is sold on a spot basis. These
dynamics provide greater flexibility and allow the Company to quickly
realize the gains associated with a recovery of economy.
US based soda ash production is well positioned from a cost perspective to
compete in world markets. To maintain profitability for soda ash, the
Company is addressing cost position through new technology and process de-
bottlenecking. The boron products profitability is being addressed through
a combination of factors involving improvement of process efficiencies to
yield more tons and the marketing of the products to specific end-use
applications yielding higher realizations.
Projects
The Company has successfully completed the projects-in-hand and is
exploring various business opportunities. In respect of the Cement project
of the Company at Mahuva, Dist. Bhavnagar, a special leave petition was
filed before the Honble Supreme Court against the order of the Honble
High Court of Gujarat allowing the construction at the site subject to
certain conditions / safeguards. In response to the order of the Honble
Supreme Court, Expert Appraisal Committee (EAC) submitted its
recommendations to the Ministry of Environment and Forest (MoEF) and
pursuant thereto, MoEF issued Show-cause Notice dated May 11, 2011 as to
why the Environmental Clearance granted earlier to the Project should not
be cancelled. The Company has submitted its response to the Show-cause
Notice and hearings have taken place before MoEF.